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10/07/2011

What was Apple thinking?

As an owner of Apple options, I have been following the company quite closely for some time now. I have to admit that I was taken in by the hype and speculation regarding the new iPhone release. I heard about the impending release of the iPhone 5 for so long that it became an expectation. When the unveiling of the new iPhone 4s happened, with no mention of the iPhone 5, it came as quite a shock to me, as it did to apparently quite a few investors.

When the shock of the event began to wear off, I tried to think of what Apple might have done differently to mute expectations before the announcement. On one hand, it's not a company's obligation to confirm or refute every speculation and rumor that is started about its products. On the other hand, allowing expectations to build without providing some tempering of the erroneous speculation (which can be done in many different ways) may very well damage the reputation of the company and cause the loss of a portion of existing as well as potential customers.

Apple has shown in the past the ability to squeeze every ounce of life out of an existing product line, always building anticipation for the next big thing. I think that the 4s will prove to be successful for Apple, allowing those who need the latest and greatest to upgrade, the procrastinators to get an iPhone 4 at a lower price, and those who might not otherwise get an iPohne due to cost to get a free iPhone 3. This move will doubtless increase Apple's share in the cellphone market, but I still wonder if they could have handled the new release more to their short term and long term advantage.

11 comments:

It seems to me that Apple is the closest thing to a bubble in marketing rather than finance that we've ever seen.

If I'm right, their strategy ought to be to ride the bubble for all it is worth. Rational players shouldn't be able to create bubbles, but rational players should be smart enough to recognize a bubble and try to ride it for profit and try to jump off before it pops. Perhaps this is all you're seeing.

I totally agree Dr. Tufte. A company needs to recognize that they are in a bubble and get as much out of a product as they can for as long as they can.

Companies all to often bring out a new product too early. This eats into the market share of the previous product. We see this often in electronics such as televisions, phones and just about any product can fall into this category.

What the marketing team needs to realize is when its time to release the new product so that it is not eating up the market shares of the old products. Businesses could save a lot of money if they got this right. At this point they are being hurt more by themselves then they are by their competitors.

Its important to be innovative and have the next best thing. But how do you know when to slow down? Or wait to release a product? Its a competitive world out there and holding back could also cost you more then releasing the new product too early.

Dr. Tufte has elevated an all ready interesting subject by saying, "Apple is the closest thing to a bubble in marketing rather than finance that we've ever seen." Dr. Tufte, will you explain more precisely what you mean by a marketing bubble? Do you mean that the consumers’ expectations are inflated instead of the price of the stock? Do you mean that Apple and its buyers market so heavily (like massive trading) that the underlying product is becoming inflated?

Maybe Apple was not thinking at all, or instead, maybe they released the new iPhone exactly when they wanted. What are the chances that Apple is just confident in their ability to innovate at a rate beyond that of their competition? Maybe this confidence is misplaced and what is inflated, and if so how will Steve Jobs' death affect that confidence? If this is the case, it might explain why they may not delay differently when releasing new products, or updates.

I know there will always be a PC verses Apple debate, and that some may not see a difference in either option. Such thinking would give credence to the thought that the expectations based around Apple’s products are inflated due to cool colors, sleek design, and general marketing. I think this may have been true in the more distant past, but not in the last decade.

Apple seems to be able to take technology that all ready exists, and package it in a way that makes it much more valuable. Different than say, a mortgage backed security which had very little transparency provided to the laymen consumer. Apple's products are tangible and users generally know if they are worth purchasing. How is the sum of technologies more valuable than their parts? Simply because the masses are able to use them. Apple didn't invent the MP3 player, streaming music online, or the touch screen pad—they simply integrated the technology in such a way that it works for the majority of us. Not only for the tech savvy people, but for people like my Father (who, by the way, has a hard time with basic Microsoft Office) and now streams music, texts pictures, and emails from his phone as good as any teenager. A firms' ability to do this seems to be very valuable.

As a result, customers have come to expect huge innovations from Apple at almost every turn. Apple introduces something like the iPad, and expectations climb, then releases new updates and profits in doing so. Often at high margins, for example, consider Apples’ economies of scale for selling software updates now that they are only sold online. All while R & D is trying to create the next big thing.

While releasing improvements to old products, Apple's marketing seems to be inflated. However, when releasing innovations such as the iPad, iPhone, or iPod--products which have had a direct or indirect impact on the vast majority of American households--I would say Apple's marketing may be flat. So in the aggregate, the level of expectations we as consumers have may be justified. Apple's marketing may or may not be inflated, but if they are not able to continue their past pattern of creating major innovation, the result will be at least a change in taste of the consumers. Like most bubbles, we will not know until it pops.

I also agree with Dr. Tufte but in a different way. Apple has I believe create their own little bubble. They have done a great job of creating their own publicity and this is exactly what they wanted. Just as in Politics sometimes negative publicity is good publicity. Apple is creating publicity and this spurs momentum. Apple lovers are going to jump ship just because apple didn't unveil the new thing they will just be that much more excited when it actual does happen.

Apple is all about being the latest and greatest product in the hands of the consumers, and for the most part, society buys into the idea that "we" need to have the coolest new product. I particularly agree with Jessica about the "procastinators" will get the iPhone 4 at a cheaper price. By building the aniticipation for the newest product, Apple is able to earn a greater margin by selling more product earlier in the product's life cycle.

A lot of people may view this as a bad move on Apple’s part, but I lean more towards the comment Joe made that Apple is confident in its ability to innovate. I’m curious to know if the death of Steve Jobs had an impact on the decision to release the 4S rather than and iPhone 5. Maybe Apple thought that it could still get more out of the iPhone 4, buy some time to make the iPhone 5 even better, and thus lead to a smooth transition to a new leader at Apple. Maybe Apple isn’t that calculated, but it’s not completely unlikely. It will be interesting to see how much of an effect the death of Steve Jobs will have on the demand of Apple products.

Joe: you're right, my label for Apple is not very clear. I hope I'm being clearer if I call is a "perception bubble" rather than a marketing bubble. What I see is that the difference between the value that people perceive in their Apple and some "fundamental computing value" is really large.*†

Joe is absolutely right that Apple is bundling in a way that other companies aren't (see the two footnotes).

Gubler Family: I like your idea of positive and negative publicity, but I don't know what to make of it. Look at Apple tying the iPhone to AT&T. This was a disaster, and somehow it didn't reflect too badly on them.

Mitchell Stone and Xavier: I wonder about this. Tech people are not usually that enamored of Apple's products: they're good but not great, and don't generate the same kind of brand loyalty amongst power users that they do amongst "somewhat elevated" users. So I think a lot of this may have to do with bundling and price discrimination, and not so much with the technology.

* There's a little bit of tech talk that ManEc students can learn that helps explain why Apple is different. Apple makes much of their own hardware and software. Microsoft doesn't: it mostly makes software. Other manufacturers (like Dell) don't either: they mostly make hardware. So Apple isn't very comparable because it is bundling its products differently (see Chapter 7).† A good analogy is that Apple is selling cars (the hardware) and with every car you get a chauffeur (the integrated software). Dell is selling you a car (the hardware) and is putting a road map in the glove compartment (the software, primarily Windows) — which is a cheaper bundle. But the goal of a car is to take you somewhere. Apple users think it's great that their chauffeur can get them somewhere, and are appalled that anyone might drive themselves there and use the road map.

Dr. Tufte said, “What I see is that the difference between the value that people perceive in their Apple and some ‘fundamental computing value’ is really large” (this is not for extra credit). I think I agree with you—at least in part. Keep in mind that I am not a devoted Apple follower, in fact I let a six month old MacBook collect dust for 3 years before I really started using it. Why? Because at the time, and for my purposes, it was much more difficult to use than my other Windows based computers. I was working on a lot of pure business projects and none of the online databases, or software downloads supported anything but Windows. I couldn’t even use Microsoft’s Mac version of Excel to support a program that required the Windows Excel version. All this led to frustration and my Macbook collecting dust. Granted, I’m sure that the Mac version of Excel works just as well as the Windows version if the user knows how to use each of them equally well and I think this is where I agree with you. However, there is a huge difference in computing value between Mac and Window’s based computing depending on purpose of the computing. For most home users I don’t think there is a difference, other than price and maybe cool colors. But if you are a semi-professional or professional photographer, musician, or videographer, the computing experience is substantial. I know there a many who use Windows for these purposes but in my experience it is mostly because of the cost of switching and the cost of re-learning a new program. Of course this is not always the case, but it is very common. Likewise, five years ago using a Mac as a primary business computer in a health care or financial services setting was almost maddening. Admittedly these differences are deteriorating as attested by my typing this post on my Mac that I pulled off the shelf earlier this year. Why pull it off the shelf after all this time? Because I finally found the time to enjoy doing some photography and when I used Windows I was reminded of using my Mac while working in the financial sector a few years ago. This is largely speaking of software, but each of these companies have backgrounds of supporting different specialized users more than the other, and as a result have created superior programs to support their respective specialized markets. Today the vast majority of users would have a very similar computing experience, but there are still specialized users that do not, and like I said—that difference is diminishing but I think it still exists.

Thanks for the long and thoughtful response. As a pretty serious computer user, I'd have to say I agree with just about all of what Joe said.

But, going back to the economics, I don't know if it matches up. There have always been hardware and hardware+software lines that were preferred by certain market segments. But those machine never attracted mainstream customers like Apple does.

Of course, this whole thread may be just missing the winner-take-all aspects of network externalities. Maybe Apple is just the first to get to a critical mass? I read something the other day that the new Windows phone is an amazing thing that everyone should buy, except now they already have a smartphone or iPhone.